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P2G LLP

The Monthly Report

7/10/2019

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The principle of all PFI projects is that Project Co (and their subcontractors) should self-report against their own performance and declare to the Authority any areas of underperformance against the Service standards. The Monthly Report is where they should do this. 

It is perhaps naive to believe that this is going to work. How many times have you sped down the motorway and then called the police at the end of your journey in the knowledge that you will be fined and awarded penalty points? It just isn’t human nature and, certainly, it isn’t typical for commercial organisations to create a culture that expects their staff to purposefully diminish their returns on a contract in order to be contractually compliant.

On this basis alone, it is important for any public sector organisation to actively read and question the Monthly Report and to ensure that it properly addresses all of the requirements under the contract. 

The minimum requirements for the Monthly Report are typically set out in both Schedules 14 and 18 of standard form contracts and will include the following:
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  • Incidences reported to the helpdesk, including the target Response Times and/or Rectification Times and those achieved;
  • Maintenance and other task based activities carried out in the month;
  • Maintenance and other task based activities planned for the next month;
  • A summary of all Failure Events and Quality Failures (or equivalent);
  • The effects of these Failures;
  • A time frame, in hours, of any event not Rectified on time;
  • The deductions to be made from the Service Payment in respect of Failure Events; and
  • The number of Service Failure Points awarded in respect of each Service for that Contract Month.

However, for each Service that is covered by the Project Agreement, it is important to go back to the Service Level Specification and look at the requirements. 

On most standard form contracts the Key Performance Indicators (KPI’s) or Service Parameters (SP’s) for each Service are typically well defined and stipulate what should be measured to demonstrate compliance. There can be up to 45 KPI’s per Service on a typical contract, so if there are say 11 Services (General, Estates, Helpdesk, Cleaning, Catering, Portering, Security, Telecoms, Pest Control, Waste and Energy Management) that could easily amount to in excess of 350 individual scores that need to be reviewed and critiqued each and every month. 

What is not always well defined, though, is the method of monitoring and the source data that will be utilised. 

For Reactive tasks, the method of monitoring is invariably measured using the Helpdesk, provided that Project Co (and their Service Providers) are properly reporting all reactive tasks using the Helpdesk (see our ‘Follow on tasks’ post). What is often missing, however, is clarity around the method of measurement for qualitative or planned tasks. It is therefore important to sit down with the Project Co and Service providers to check whether the contents of the monthly report do in fact evidence compliance with each of the KPI’s or SP’s.

Typically, the Authority will have a defined time frame to raise any issues with the self-declared scoring. This is typically two months, although in order to get any issues properly credited in the current month’s invoice, you may have as little as 5 days. Once two months have passed, the Monthly Report and the data it contains become the sole record for the period, with no challenges able to be raised except in cases of deliberate misrepresentation, gross incompetence, gross negligence, or fraud.

P2G actively monitor the performance and monthly reporting on a number of NHS PFI projects and our experiences to date suggest that there is a large divergence between reported and actual performance when measured against the contract. If you are interested in checking whether you are receiving the Services for which you are paying, please feel free to get in touch. 

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PFI Insurances

24/10/2013

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Under a typical PFI contract, insurance is procured by the private sector. In the operational phase this generally includes cover for material damage, business interruption, public and third party liability.

At Financial Close, insurance has historically been priced on the basis of a stand-alone project to ensure that insurance can be re-provided in the event of Lender or Authority step-in.

Over time, insurance premia for PFI risks have reduced considerably for two main reasons:

  • Underwriters increasingly view PFI as a well maintained sector with relatively low risks and the last few years has seen a number of new entrants into the PFI sector, eager to do business.
  • Post operational commencement, many projects have grouped their insurances under a portfolio arrangement facilitated by the major PFI shareholders. Whilst still being individual project policies, the private sector has aligned renewal dates on projects with the resultant benefit of lower premiums from underwriters. This is commonly referred to as the “portfolio effect”.

Most PFI contracts since around 2003 have benefitted from Gain or Risk Sharing Mechanisms with respect to insurance premiums. These typically allow for the public sector to benefit from reductions (or contribute to increases) in actual insurance premiums when compared to the original contract price at Financial Close.

However, we are seeing many instances where the private sector has argued, when presenting risk share savings to the public sector, that the “portfolio effect” is an issue that should be carved out from the mechanism due to the fact that it is entirely down to their actions. Often, the public sector have accepted this argument. In addition, although most portfolio insurance placements include a low claims rebate, the private sector tend to omit this from their calculation of any gainshare. Together, this approach means that the private sector is top slicing the benefit that risk sharing was there to give.

It should be remembered that the private sector is partnering with the public sector for long periods. The terms of the agreement generally require the private sector to cooperate, pursue good industry practice, and mitigate costs. We would argue that actual means actual and shouldn’t be subject to manipulation. More importantly, the public sector can obtain insurances in line with those obtained by the private sector.

P2G, through its frameworks with a well known PFI insurance broker, is able to facilitate equivalent cover at market rates for the benefit of the public sector that at least match the premiums that the private sector can procure at, inclusive of their “portfolio effect”.

What does this mean for public sector bodies?

No longer should a public sector body allow the private sector to run any sort of argument about portfolio rates being excluded from a sharing mechanism. The result should be real returns to public sector budgets. There are over 900 PFIs and the benefit accrued from this one small measure is gained annually. The benefit to the exchequer is huge.


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Honesty and PFI contracts

4/5/2013

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PFI has had its fair share of bad press over the last few years with some notable headlines on poor value for money.  For the most part, though, the private sector has only played by the rules of the contract. These contracts, we should not forget, were initiated and largely drafted by the public sector.

However, there is one principle of PFI that seems to have escaped the spotlight in the furore over high debt costs, poor management or refinancing benefits: the principle of honesty.

What constitutes honesty?

Few would argue that the private sector shouldn’t make a profit out of what they do as long as they do it well. Private sector profit does not equal public sector loss.

Equally, wherever we sit on the ideological spectrum, we can all agree that fraud or misrepresentation is dishonest and should be punishable under the contract, which of course it is.

But there is a gulf in between these two ends of the spectrum in respect of how we expect people to behave, an area we have seen highlighted by recent notable issues such as what MPs should properly claim as expenses, what constitutes improper tax avoidance, or even whether tradesmen should be paid in cash.

So how is this relevant to PFI? Well, one of the underlying principles of PFI contracts is that of self-monitoring by the private sector.

The private sector, under most existing PFI contracts, have an obligation to report where they have not done something correctly; whether this be a performance failure or a breach of contract.

Does this happen? No one will be surprised to hear that the answer is an emphatic “no”. If anyone were to suggest the abolition of breathalyser tests by the police on the basis of self-regulation by alcohol consumers, they would be held up to ridicule. So why should PFI be any different?

Because this is what the private sector has agreed to do. Indeed, it is one of the things that the public sector is paying for under their PFI unitary payments. In many cases the private sector have overlaid high management fees on top of service delivery costs against their obligations to monitor performance.

The only answer in the long run, of course, is for the public sector itself to monitor performance of the contract. The NAO recently suggested that the public sector should be spending, on average, one per cent of the costs of PFI on monitoring. Unfortunately, in many instances, either the public sector will find this unaffordable, or it may not have the in-house resources to monitor areas of the contract that are not purely service performance related.

However, if the public sector is already paying for something that isn’t being done, increased monitoring is not the complete answer. So what is?

There are two options for the public sector:

The first is to vary the existing contracts to omit this obligation, thus clawing back the costs of this obligation from the private sector. Unfortunately, this is unlikely to work as the private sector will argue that they still need to monitor performance as a separate duty to the project lenders, or for their own purposes, and thus will offer back negligible savings against the omission. This will be both difficult to counter and, arguably, self-defeating in the sense that we should expect the private sector to monitor performance.  In many cases it is not the monitoring that isn’t being done; rather it is the failure to honestly impart the results of the monitoring that is at fault.

The second option is to leave the obligations alone, but to properly enforce the contracts where the private sector does not self-monitor or report properly. Too often, when fault is found, the public sector’s expectation is to either just be grateful that the issue is fixed, or for small performance penalties to be levied.

We are not advocating a raft of litigation for breach of contract but, rather, a radical shift in behaviours, both from the private sector in terms of their honesty and integrity, but also from the public sector contract monitoring teams who must be given the support and advice to properly use the contract terms for the betterment of long term delivery.


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    Authors

    The authors have experience of more than 100 PFI projects in multiple sectors.

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